Texas PRIMA. November 9 th, 2016

Transcription

1 Texas PRIMA Costs are Up, Costs are Down, and COPE Data is Key, Managing Property Valuation and Data Issues in Today s Economy Nigel P Wilson, ASA, CEng, MIMMM, Director, Insurance Services Craig Derrick, Director, Insurance Services November 9 th, 2016

2 Outline of Contents Property valuation Why? >> 3 Initial diagnostic review of property values >> 6 Property valuation resources >> 10 Trending fixed asset records >> 21 Valuation of Historic Properties >> 22 Valuation solutions and engaging a valuation consultant >> 28 COPE data and catastrophe risk modeling >> 31 Desktop versus site inspection of buildings >> 35 2

3 Property Valuation, Why? Questions that you need to ask yourself Are you confident that your statement of values accurately reports all of your insurable property? Have you kept pace with the change in assets within your facilities? Do you know where your properties reported insurable values come from? How well was your statement of values received when last marketed, did you receive push back from underwriters? 3

4 Benefits of an Insurance Appraisal Determine the adequacy of insurance coverage Complete property listing Accuracy of values No surprises at the time of loss Improved risk management Consistent approach to quantification of risk Improved marketability to underwriters Optimizes CAT modeling performance Basis for equitable allocation of premiums Basis for preparation of a proof-of-loss Partnership Insured/Insurer 4

5 Typical missing buildings New buildings Significant additions / renovations Park buildings Waste water lift stations (new developments) Buildings acquired by foreclosure Portable classrooms It is not atypical to add 15-20% to the total building count of a municipal risk pool 5

6 Initial Diagnostic Review of Property Values What s the source of your current property listing and values? Appraisal Trended historical costs Standardized property values worksheets New construction costs Staff estimates Assistance from your Broker / Underwriter (Marshall & Swift brown book ) Don t know! 6

7 Initial Diagnostic Review of Property Values Analyze property values by: Occupancy: Municipal Office Building, Town Hall, Fire Station, Water Treatment, Wastewater Treatment, High School, Community College, Library, Senior Housing, etc. Use gross area (square foot) as a basis of comparison: Exterior wall to exterior wall; include basements, parking, common areas, etc. Develop $/Sq. Ft for buildings and contents Use process capacity as a basis of comparison where appropriate: $/Units/day; $/MW; GPD; etc. 7

8 Cost/SqFt Comparison Replacement costs should be similar, if not, why not? Buildings Historic vs Modern construction Architecturally significant vs plain-jane High quality materials vs low cost/quality Large vs Small building Replacement vs Reconstruction cost basis Contents Mixed occupancy Occupancy density Change in occupancy Manufacturing / Warehouse / Office ratios Incorrectly classified 8

9 Case Study SoV Analysis Defense contractor, 150+ US locations, $2.0 billion TIV (property only), 6,000,000 SqFt Request to review SoV and prioritize top 10 locations for appraisal One of top 10: Mid Western city 610,000 SqFt Built 1950s Office/Manufacturing/Warehouse occupancy Buildings - $21,000,000 Personal Property $22,200,000 Why was this selected for top 10? One of the largest locations, area 10% of total Only 2% of TIV Buildings - $21,000,000 ($34.43/SqFt) Personal Property $22,200,000 ($36.07/SqFt) Appraisal results Area 636,822 SqFt Buildings - $81,000,000 ($127/SqFt) Personal Property $48,000,000 ($75/SqFt) 9

10 Construction Costs - Benchmarking Resources Construction Cost Information (US) Marshall & Swift R.S. Means Design Cost Data 10

11 Current Cost Trends - Construction (1% to 3% per year) Significant construction inflation in 2004 (10.5%) Slowing but not back to normal in 2005 and 2006 (5.5% to 8.0%) A definite slowing in 2007 (2.8% to 4.7%) Commodities cause increases in 2008 (6.7 to 7.2%) Prices fall back with economy in 2009 (-7.0 to -0.3%) Inflation stabilizes in 2010 (-1.4% to +4.9%) Continued stabilization in 2011 (2.5% to 4.5%) & 2012 (1.5% to 2.8%) Slight upturn in 2013 (2.2% to 3.7%) Steady in 2014 (0.5% to 2.9%) Most recent 12 months sees a decline in the rate of inflation» FM Global +1.3% (July July 2016)» RS Means +0.5% (July 2015 July 2016)» Marshall & Swift +0.0% average, range -0.3 to +0.5% (July July 2016) 25% - 30% inflation in seven years Sources cited: FM Global, Industrial Cost Trends, United States Industrial Building Average RS Means, 30 City Average Construction Cost Index Marshall & Swift, Quarterly Cost Index 11

12 US Construction Cost Trends US Average Construction Cost Indices, January 2000 to July RS Means, 30-City Average FM Global, US Average Marshall & Swift, US Average Sources cited: RS Means, Quarterly Construction Cost Trends, 30-City Average Marshall & Swift, Marshall Valuation Service, US Average FM Global, Industrial Cost Trends, United States Industrial Building Average 12

13 Construction Cost Indices Houston Houston Area Construction Cost Indices, July RS Means, Houston FM Global, South West Marshall & Swift, Houston Sources cited: RS Means, Quarterly Construction Cost Trends, Houston Marshall & Swift, Marshall Valuation Service, Houston FM Global, Industrial Cost Trends, Industrial Building, South West 13

14 New Construction Outpacing Reconstruction, School Construction Costs School Construction, Median Cost per Square Foot $ $ $ Elementary Middle High 229% 218% $ $ % $ $ $ $ $ Source cited: School Planning & Management, Annual Construction Cost Reports, , costs are for the entire project, including fees, furnishings and construction 14

15 Current Cost Trends - Construction What s driving the increase in construction costs Elaborate design Green building features Increased initial construction costs to save operational costs 21st century learning environments Technology Security requirements Environmental issues Local zoning requirements Cost mitigation measures Architectural prototypes Long term contracts with contractors and architects 15

16 Cost Trend Resources, Construction United States Construction: Marshall & Swift R.S. Means FM Global Engineering News Record 16

17 Equipment Cost Trends Machinery and Equipment Inflationary Increases, Most Recent 12 Months Marshall & Swift, Industrial Average 0.9% 2.0% -1.0% -0.8% (July 2016) FM Global, Industrial Equipment Composite 1.7% 1.6% 0.8% 0.4% (July 2016) BLS, PPI Capital Equipment 1.2% 1.2% 0.8% 0.2% (July 2016) Currency fluctuations are creating new replacement cost realities for imported machinery and equipment. Sources cited: Marshall Valuation Service, Marshall & Swift Quarterly Cost Index, Industrial Equipment Average of All FM Global, Industrial Cost Trends, Industrial Equipment Composite US Department of Labor, Bureau of Labor Statistics, Producer Price Index, Capital Equipment, Table WPUSOP

18 Equipment Cost Trends Equipment Cost Indices - Increases 2000 to July BLS - PPI FM Global - Equipment Average M&S - Equipment Average M&S - Office Equipment M&S - School Equipment Sources cited: M&S: Marshall Valuation Service, Marshall & Swift Quarterly Cost Index, Industrial Equipment Average of All FM: FM Global, Industrial Cost Trends, Industrial Equipment Composite PPI: US Department of Labor, Bureau of Labor Statistics, Producer Price Index, Finished Goods Seasonally Adjusted, Table WPSSOP

19 Equipment Cost Trends Chemical Process and Oil & Gas Equipment Cost Indices, July Marshall & Swift, Chemical Marshall & Swift, Petroleum Nelson/Farrar, Total Refinery Chemical Engineering, Total Index Sources cited: M&S: Marshall Valuation Service - Marshall & Swift Quarterly Cost Index, Chemical & Petroleum Equipment Indices Oil & Gas Journal, Nelson/Farrar total refinery index Chemical Engineering Magazine, Chemical equipment total index 19

20 Cost Trend Resources, Equipment / Personal Property United States Equipment: Marshall & Swift FM Global US Dept. of Labor, Bureau of Labor Statistics Handy Whitman Index of Public Utility Construction Costs 20

21 Trending Fixed Asset Records Identify insurable property - No land or site development costs Site improvements? Trends are not an absolute Fixed assets diverge from reality eventually Don t trend: - Used costs - Allocated costs - Internal transfer costs Renovations/Rebuilds Expensed items Non-US sourced assets Transferred assets Allocate assets to individual buildings Property of others Offsite assets Don t trend longer than 7 10 years 21

22 Valuation of Historic Properties 22

23 Valuation of Historic Properties 23

24 Valuation of Historic Properties Valuation Challenges Accurate Dimensions No plans, irregular construction Construction details: Elaborate/Ornate design Unusual/higher quality materials Higher quality of craftsmanship Special features 24

25 Valuation of Historic Properties Valuation Challenges On-Site Procedures: Extensive photography Measure and draw floor plans Identify and quantify construction materials Identify and quantify unique features Towers, Spires, Organs, Clocks, Carillons, Chandeliers, Stained Glass, etc. Office Pricing Procedures: Segregated cost analysis Cost adjustment for material quality/design Research costs with industry sources Compare conclusions with similar properties 25

26 Renovations of historic properties and tracking insurable values Insurable value = Original cost x Cost index Built in 1890 for $250,000 Index/multiplier from 1890 = 55.0 Insurable Value = $250,000 x 55 = $13,750,000 Is this reasonable? Renovation costs $300,000 ($9,000,000) (additional wing and updated entrance) $750,000 ($9,750,000) (finished basement area and updated interior finishes) $2,500,000 ($7,500,000) (updated building services/hvac) $6,000,000 ($6,600,000) (updated ADA compliance, lighting, wiring, HVAC, system controls and exterior finishes repaired) Total current cost of renovations = $32,850,000 Are renovations adding cost or just curing physical depreciation? 26

27 Renovations of historic properties and tracking insurable values Recent example Public library, built in ; removal of tower to make way for stack additions 1933; renovation changing architectural exterior design 1968; new wing 1986; system upgrades 2005; upgrades to building systems, elevators, wireless internet, security, and code upgrades 2015 insured value of $20,800,000 = $850/SqFt 2015 Historic appraised value $10,900,000 = $440/SqFt Typical high quality new libraries in local area being built for $275 to $300/SqFt 27

28 Valuation Solutions - Data Required for a Valuation Services Quote Size and Scope of Valuation Services Current SoV Property details Size (total square feet/square meters) Occupancy/product Number of buildings on site Sketch/plot plan Loss prevention report Asset description requirements for client/underwriter/broker Modeled contents, single value for all assets within each building Asset level detail, inventory 28

29 Valuation Solutions Appraisal Programs Identification of high-priority sites based on: Value Risk profile Degree of confidence in existing values Key location driving policy limits Perform diagnostic analysis of recent statement of insurable values and related data Sample sites by occupancy / product Sample sites by region Appraise specific number of sites per year Build database for site comparison Update prior appraised sites by trending (limit five to seven years) 29

30 Insurance Appraisal Services - Buildings Component-Based Appraisal Methodology Buildings - site inspection Review of available as-built plans Measuring of dimensions Determination of primary construction components Review of building services, interior and exterior finishes, etc. Photographing of each building Development of replacement cost using local construction cost resources Reporting of values (and COPE data if required) by building Evaluation of land improvements (if required) - parking lots, signage, outdoor lighting, etc. We do not recommend trending building costs: High probability of capitalized renovations results in excessive replacement cost Unable to break out original costs by individual building 30

31 Valuation Solutions - Buildings COPE Data Underwriters are interested in receiving more than just a valuation; they also want COPE data. Construction (e.g., frame, brick, masonry, masonry veneer, etc.) Occupancy (how the building is being used) Protection (e.g., quality of the responding fire department, adequacy of water pressure and water supply in the community, the presence or absence of smoke alarms, etc.) Exposure (risks of loss posed by neighboring property or the surrounding area, taking into consideration what is located near the property, such as an office building, a subdivision or a fireworks factory) Duff & Phelps reports primary COPE data as a standard deliverable in addition to insurable values. 31

32 Insurance Appraisal Services - Buildings Standard COPE Data Occupancy Address Class of construction Year of construction Square feet of space Number of stories Average story height Wall construction Roof construction Heating system Cooling system Fire alarm Sprinklers Entry alarm GPS coordinates Optional COPE Data Plot plans Flood zone certification Secondary Windstorm COPE Data Construction quality Roof covering Roof age/condition Roof geometry Roof anchor Roof equipment bracing Basement Appurtenant structures Cladding type Roof sheeting attachment Frame/foundation attachment Ground-level equipment Opening protection Flashing and coping quality Content grade 32

33 Secondary COPE data, the impact Florida College System Risk Management Consortium (FCSRMC) Risk sharing pool with 175 campuses, 2,380 buildings, TIV $6.7 billion Issue mitigate property insurance pricing increases and capacity reductions arising out of introduction of RMS v.11 in Renewal: premium increase of $1.6M, wind capacity $90 million, a reduction of $60 million Carriers blamed loss in capacity on the substantial increase in the FCSRMC model results under RMS 11 versus RMS 10. Actions: data collection project and personal visit to Lloyds to solicit more property wind capacity Duff & Phelps (formerly American Appraisal) visited all 2,380 buildings to collect primary and secondary COPE, FRSRMC already had good values, cost $160,000 GA PRIMA Chapter, October 14th,

34 Secondary COPE data, the impact Florida College System Risk Management Consortium (FCSRMC) 2013 renewal results: Modeling results reduced 250 year PML by 44%, and AAL by 47% Wind capacity increased by 39% to $125 million with a 9% increase in total property program cost 2014 renewal results: Property wind limit increased from $125 to $150 million 7% property premium decrease Since 2012 overall premium remained flat with 10% exposure increase and $60 million wind limit increase GA PRIMA Chapter, October 14th,

35 Valuation Solutions - Buildings Site Inspection versus Desktop the difference Accuracy of Square Footage Accurate determination of construction materials Quality of construction Appropriate Model usage Additional building features Collection of primary & secondary COPE data Site specific factors Shape / perimeter required for accuracy 35

36 Valuation Solutions Contents / Personal Property Appraisal Programs Contents/personal property valued by modeling approach Recommended when personal property is of much less significant value than real property Based on appraisal company s prior full surveys of similar occupancies $/SF used and adjusted when necessary by appraisal staff Typical for public-sector occupancies 36

37 Valuation Solutions Contents / Personal Property Appraisal Programmes: Fixed asset trending with brief site inspection Requires accurate fixed asset list with true original costs Manufacturer, model, serial number, original cost, year of acquisition and locations within the property Application of appropriate cost trends prior to site inspection Onsite limited verification of existence of significant assets Limited addition/deletion of assets based on findings Limited re-costing to validate cost trends Contents costs reported by building if identified in fixed asset record, otherwise by overall site Typical for light manufacturing occupancies 37

38 Valuation Solutions Contents / Personal Property Appraisal Programs Detailed asset listing by comprehensive site inspection Inspected and inventoried Asset number, description, model number, serial number and manufacturer Predetermined equipment listing cut-off, suggested is $100,000 Logical production lines and single assets with replacement cost $100,000 listed Asset below this cost grouped with like kind assets Assets repriced using a variety of sources Values reported by floor by building Typical for HPR occupancies 38

39 Report Formats Final report formats The following are typically available PDF reports Web-accessible reports Stores original PDF reports Select and view individual buildings and associated contents Sort on five different levels using 16 key data elements Download sorts to Excel and PDF Allow restricted access to employees/brokers/underwriters 39

40 Qualifying Valuation Consultants Factors to consider when engaging an appraisal consultant Qualifications and experience - a match to your properties Professional accreditation ASA, Appraisal Institute, ASFMRA, etc. Experienced Full-Time Consultants Uniform Standards of Professional Appraisal Practice (USPAP) Compliant Reports Internal Quality Review / Controls Size of staff Optional services Fair market value of real estate Fixed asset inventory and reconciliation services 40

41 Summary Points Benefits Improved risk management and marketability of insurance portfolio Diagnostic Review Are your present values reasonable? Cost Trends Construction cost trend uncertainty receding Trends are average indicators of change, they are not absolute Valuation Solutions and Engaging a Valuation Consultant Be an informed purchaser, customize your scope Increased demand for COPE data 41

42 Michael Domin Managing Director Managing Director Michael is a managing director of business development for the Fixed Asset Management and Insurance Solutions group (FAMIS). He has more than 16 years of experience in the professional appraisal industry, and currently works to develop client solutions for public, private and nonprofit entities. As a consultant, Michael completed infrastructure valuations for various public entities including counties, cities, independent park districts, municipalities, universities, colleges, risk pools and school districts. He specialized in the appraisal of building construction and water and wastewater utilities. In addition, he valued traditional and modern churches, parishes, convents, and rectories. He continues to provide quality assurance for church appraisals. Michael has valued fixed assets and buildings for purposes of insurance, accounting, and property records. He has also completed infrastructure studies and performed valuations for compliance with GASB 34. Duff & Phelps, LLC Chicago. Lisle Michael.Domin@duffandphelps.com Michael joined Duff & Phelps through the acquisition of American Appraisal in He joined American Appraisal in 2000 and worked in various valuation consulting and management positions until 2008, when he joined the business development Michael earned his Bachelor of Business Administration at Carthage College. 42

43 Craig Derrick Director Craig is responsible for the management, performance, quality, fee generation, and profitability of the Dallas fixed asset management and insurance practice operations, providing the proper guidance, direction, and communication to those within the group. He collaborates closely with Duff & Phelps business development personnel to establish new opportunities. In addition, Craig is responsible for each engagement s management, execution, and quality; compliance with applicable laws and standards; and the establishment of a client focus, which results in excellent client service. Duff & Phelps, LLC Addison Craig.Derrick@duffandphelps.com Craig has over 11 years of managerial experience in the industry and 15 years of project management experience. His expertise includes knowledge with property insurance and the evolving needs of that marketplace. His valuation experiences are with real and personal property, including fixed assets and their reconciliation procedures, as well as the appraisal of land improvements, buildings, and infrastructure. Primarily, Craig serves public sector clients, involving both state and local government, healthcare groups, public schools/colleges, and water/wastewater utility treatment. He has advanced knowledge of various appraisal practices and client portfolio management, specializing in complex engagements and high-value risk in the property insurance marketplace. Craig holds a B.A. in Communications with specialization in Public Relations from the University of Texas at Arlington. He is also a candidate member of the American Society of Appraisers. 43

44 Nigel Wilson, ASA, CEng, MIMMM Director Nigel Wilson is a director of insurance services at Duff & Phelps and is part of the firm's Fixed Asset Management and Insurance Solutions (FAMIS) practice. Nigel has deep expertise in developing the cost approach for insurance purposes in all industrial, commercial, and institutional occupancies, as well as cost trend development and maintenance. Nigel has provided his insurance valuation expertise to a broad spectrum of noteworthy clients including Kraft Foods, Las Vegas Sands, CSL Behring, Cooper Tire, Johnson Controls, DRS Technologies, Omni Hotels, Nike, Vishay Intertechnology, Harvard University, Massachusetts Bay Transportation Authority Exelon, Massachusetts Institute of Technology and many more. Nigel joined Duff & Phelps through the acquisition of American Appraisal in 2015 where he held various positions within the Industrial Valuation and FAMIS practices. Prior to American Appraisal, Nigel was with FM Global where he served as a manager of appraisal standards for over 20 years. Duff & Phelps, LLC 225 Franklin Street, Floor 21 Boston, MA T M Nigel.Wilson@duffandphelps.com Nigel is a thought leader, frequent speaker and author on various topics related to insurance valuation. He is the editor and contributing author to the firm s Insurance Valuation Services Today e-newsletter and has been a qualified instructor of the American Society of Appraisers machinery and equipment valuation courses for the past 25 years. Nigel is an active member, former Chapter President and Committee Chair of the American Society of Appraisers. He is professional member of the Institute of Materials, Minerals and Mining and a chartered engineer. Nigel is also an active member and past committee chair in the University Risk Management and Insurance Association. Nigel earned his B.S degree in Metallurgy from the University of Aston in Birmingham, England. 44

45 For more information about our global locations and services, please visit: About Duff & Phelps Duff & Phelps is the premier global valuation and corporate finance advisor with expertise in complex valuation, dispute and legal management consulting, M&A, restructuring, and compliance and regulatory consulting. The firm s more than 2,000 employees serve a diverse range of clients from offices around the world. For more information, visit M&A advisory and capital raising services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory and capital raising services in the United Kingdom and Germany are provided by Duff & Phelps Securities Ltd., which is authorized and regulated by the Financial Conduct Authority.